Large and small, many traders were faced with colossal losses and in many cases funds and small traders alike were entirely wiped out and insolvent.
There are 2 important observations that can be drawn from this remarkable event.
1. Both large traders and small traders were severally guilty of improper risk allocation by improver weight in portfolio management techniques applied to any one given trade. The resulting over-emphasis of a single trade led to insurmountable liquidity seizures for large and small trader alike.
2. The improper art of trading and sizing up led to exponential losses as reversals compounded trades that were caught wrong-footed. Over-trading can easily occur when traders seize momentum and given technical grounding start adding to their positions with more and more trades taken in the direction of the expected move.
The astute position trader who has seen just about everything in the market is the trader that -
1. does not place more than 10% of his 10 eggs in a single basket in a over-simple illustration of the principle of diversification. 3-4 eggs in a single basket can compound errors when errors occur and minute probability becomes a causal nightmare
2. doubling up - an astute trader does not get carried away - example - improper pyramiding - taking 1 long trade 0.93 in Feb 2014, 2 long trades in Oct 2014 at 0.94, 4 long trades 0.96 in Nov 2014 and using profits to sustain further long positions. Pyramiding trades is always a dangerous principle
Conclusion - What goes down goes back up. Fibonacci was one of the first mathematicians to point out this principle of cyclical numbering in the universe. The Jan 16th 2015 price reversal in the USD/CHF, with the USD as base, at the time of writing, within a matter of only 4 short weeks, has almost retraced a staggering 50% retracement of the price reversal action initiated on Jan 16th. Traders that survive in the long run are able to anticipate the rhythmic nature of prices. The key to good trading is never to over-trade, maintain liquidity and when stop losses are over-run in catastrophic price reversals as in the case illustrated above, to remain calm till the market eventually settles, and then work out the next plan within the context of the big market move.
Consistent traders are never caught in a liquidity crisis during a market reversal; they have the innate ability to step aside and wait with patience understanding that in the long run all anomalies will iron out within the conceptual analysis of price disequilibrium and equilibrium.
Pieter Bergli - DeLoren Trust Holdings
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Futures and Options trading involves risks of losses. No representation is being made that any reader and account will or is likely to achieve profits or losses similar to those that are being discussed on this blog http://forexeducationperspective.blogspot.com/. The past performance of any trading system or methodology discussed is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
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